Retirement and Financial Independence

Five Questions: Profit Sharing, Tradelines, 403B’s


The guys tackle five great listener questions today. For full answers listen to the episode below.

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Question One:

Can you guys explain the difference between a regular 401k vs profit sharing 401k. What’s the difference between the two and can you with draw from both early?

Profit Sharing is solely employer-funded. You’re not putting money from your paycheck into it like you would a 401k. It is your employer making contributions towards your retirement.
Contributions are usually based on the percentage of salary – higher salary = higher profit sharing. As for withdrawal, the plan administrator has a lot of decision making power in determining pre-withdrawal requirements.

For a 401k, the employee is the primary contributor to account. Some employers will match contributions, but not a requirement. Even if they match in given year, an employer can suspend matching in future years. Your contributions are completely vested right away, but employer contributions can have vesting requirements such as having to work a minimum amount of years.
There are certain circumstances where there are penalty free withdrawals like for hardship but most early withdrawals will cost you.

Question Two:

Are trade lines even a legit way to build credit? Or is it just a scheme? Im a late bloomer with my credit and Im looking for a way to build it up. And where should I put money? I’m saving for a vacation? In a capital one 360 savings account, mix in with my betterment build wealth account, Acorns, or some other strategy?

Tradeline is industry term for an account or line of credit. If you Google tradelines all the top result are marketplaces for trade lines or credit accounts. So why would you buy a line of credit?

Lets say Andrew has a Capital One credit line that he has been paying on time for 5 years which puts the account in good standing. Thomas on the other hand has only one line of credit for a year with some late payments and now he wants to build his credit.

Thomas can go to one of these tradeline market places where Andrew is selling his good tradeline. Thomas can purchase his credit line to help build his credit. Andrew would add Thomas as an authorized user. Then, Thomas would remove Andrew as an authorized user and viola, Thomas now has a 5 year credit line in good standing and credit score increases.

Yes, this is some shady shit and we do not recommend this. There are many other ways to increase your credit.  Try applying for a secure credit card or use a third-party rent reporting service so your on time rent payments count towards your credit.

As for the second question, if you are planning on traveling soon, there isn’t a need to put your vacation savings into an investing account. Any short term savings are better off in a checking or savings account.

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Question Three:

So I stopped my contribution to my 403b today (teacher) because the returns on it sucked a bag of dicks. I was getting guaranteed 3% and paying fees, which I’m confident I can improve upon by managing my investments myself. The money I’ve contributed thus far is less than $3,000 and I’ve been putting into it for a while. I’d like to roll it over into something else but the company I have the 403b with, Great American) hits me with MASSIVE fees if I move the money before the contract with them is up and I can’t move that money to anything other than another 403b according to the IRS. All that to say, I am willing to just cut my ties with that money for now, still have it in my tiny portfolio but just stop funding it.

Now, I can spare about $150 to throw towards investments. I already have a Betterment account with about $25K in it and a CA teachers retirement account that automatically gets deducted from my check each month so now I’m wanting to really build some wealth.

Do I: Find a different 430b fund to put money into?
Start a different Betterment retirement account, something I can’t touch for several years?
Start a Vanguard account of some form?
Throw a big chunk into Lending Club then throw $150 on top every month?
Something else I haven’t heard about.
Thanks for answering my questions, I really appreciate the work you guys are doing!

If your company does not have 403 B matching, then you are better off investing it yourself. Putting your money in your employers plan it is limiting your investment choices. Try Vanguard or Betterment. They all have great funds with low fees. If your company does match, contribute, then take the free money! Contribute as much as they will match and then set up an Roth IRA contributing post tax money. A 403b does reduce your taxable income but the Roth IRA your gains are tax free forever.

Question Four:

First off, let me start by saving I love the podcast and website! Not even sure how I stumbled upon it to be honest, but I have recently started to take a deeper dive into my finances and try to get on track (I’m sure you’ve gotten thousands of these emails). Anyway, I am 26 living in Hoboken so listening to Andrew speak about living here and not being financially reckless was a real slap in the face for me.

My question for you guys today is about my 401k with my new job. I am going to be eligible to start contributing this month, and I found out there is no employer match, like my old job (bastards!). Do you guys recommend a certain percentage to contribute, or should I not contribute at all? Or is there another investment vehicle I should be considering? My last job I always made sure I met the match, and in the 6 months since I started this new job I have opened a Vanguard Roth IRA and plan to max out the contribution.

In my mind I would contribute to the 401k anyway, just to harness the pre-tax benefits and compound interest etc, etc, along with contributing to the IRA. But just wanted to bounce this one off you. Thanks, and looking forward to more content!

We don’t want to come across as anti 401k, but without matching you can probably do better investing it yourself. There are some people that actually have great allocations through their companies and with matching it’s a no brainer.

If they are not matching and their investment choices aren’t great, you might as well just invest it yourself. You get the same pretax benefits contributing to a traditional IRA as you would a 401k. You also won’t have to worry about a rollover if you leave your job.

To make it as easy as possible, just set up auto withdrawal to make a contribution every paycheck. You can easily set up systems to the manage money yourself using Betterment.

Question Four:

I live in New Jersey and am currently making about $50K. I have a car loan that is about $6,200.00. And, I have student loans that equal to about $10,000.00.

I recently was accepted into grad school at Stevens Institute of Technology for Business Analytics (I swear I’m not stalking Andrew). Part-time tuition per class is ~$4,500.00. My question is should I defer my acceptance to next year and pay off my car loan first? Or should I just take one class in the Fall? I should note that my company pays for my education up to $6,000.00 contingent upon getting at least a B or higher.

Thanks. Love your Podcast.

If your company pays for your schooling entirely (or the grand majority), and if you’ll continue to work and make your current salary, go to grad school. This is assuming you have good reasons for going to grad school. What’s your plan? Will your company promote you if you get the degree?

If you’re going to have to pay a substantial amount out-of-pocket (or if you’ll have take loans), or if you’ll have to stop working, we recommend holding off and Stack-Methoding that debt. At the very least, whittle down the car loan and any private student loan debt. Any federal debt can be put onto an IBR, ICR, or PAYE plan to keep it from eating up discretionary income.

If you’re sitting at a middle ground where your tuition isn’t going to cost you a ton, and you can still work, then you’ll have to do the math and risk analysis yourself. This middle ground is a little more spongey. But our general principle is to kill debt quick.

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